Today, the US House of Representatives voted against the proposed government bailout of US financial institutions. Good. We have a mostly free marketplace, and the less government intervention the better. Yes, the government should set the rules, and perhaps even adjust them every great once in a while. What the government should NOT be doing is constantly tweaking the rules and then bailing out the losers simply because they happen to be large.
Having the government artifically control the marketplace is…well…communism. And we all know how well that has worked, historically. It’s easy to understand why the government feels the need to do something – if they don’t, and the natural market corrections occur, many people will feel a lot of pain. And most of those people will also be voters, and injured voters tend to react by throwing out whoever is holding the hot potato when the music stops.
And the music is definitely stopping. After years and years of reckless financial policies, major institutions are finding that their worth is now based on undercapitalized loans to unqualified borrowers on overpriced assets. Historically, we had regulations that prevented our large financial institutions from leveraging themselves so unwisely, but those regulations have been eroded over the last decade or so, and now the bill has come due.
And the bill must be paid, no doubt about it. However, the bill should be paid now, by virtue of natural market corrections (with the associated, short-term pain) rather than through government bailout money, which can only lead to a solution that is, at best, inefficient, and, at worst, rigged to benefit the politically powerfully. Personally, I trust the capitalist marketplace more than I trust the Federal government when it comes to the free market. The government’s job is to set up a level playing field, but then not interfere in the game.
Can you imagine the outrage if, with four minutes to go in the Super Bowl, the NFL announced a bunch of rule changes, applicable immediately and designed to impact the outcome of the game in progress, simply because the team they preferred wasn’t winning? Say it was the Dallas Cowboys versus the Baltimore Ravens, and the NFL desperately wanted Dallas to win because it would mean much higher fan interest and revenues for the following seasons, and Dallas is behind with 4 minutes to play. So, the NFL announces that the Cowboys can immediately gain access to the Ravens full playbook, and listen in on all their called plays and headset communications. Oh, and the Ravens have to bench their top offensive and defensive players, and their head coach has to spend the last four minutes of the game in a sound-proof isolation booth and can’t communicate with any of his players or coaches.
That would be outrageous. But that’s what they’re trying to do with this bailout. Every financial transaction is like a bet, at some level. Every